Bank of America Merrill Lynch (BofA-ML) today said India's industrial output (Index of Industrial Production – IIP) for the month of November is likely to contract by 1.5 per cent largely owing to post-Diwali base effect.

"November industrial growth will likely contract by 1.5 per cent on post-Diwali base effects after jumping 8.2 per cent last month to meet pre-Diwali consumer demand," Bank of America Merrill Lynch India economist Indranil Sen Gupta said in a research note.

According to the report, the December inflation will likely continue to peak off to 7.3 per cent.

Against this backdrop of growth slowing and inflation topping off, the Reserve Bank of India is likely to cut key policy interest rates by 0.25 per cent on January 29, Bank of America Merrill Lynch said.

"We expect the RBI to cut policy rates by 0.25 per cent on January 29 to signal lower rates with inflation coming off in the March quarter. It will likely also cut rates by an additional 0.50 per cent by June with inflation likely to dip below 7 per cent," Gupta said.

India had been growing around 8-9 per cent before the global financial meltdown in 2008. The growth rate in 2011-12 slipped to a nine-year low of 6.5 per cent.

According to the official data, the Indian economy grew by 5.3 per cent in the July-September period this year, while in quarter ended June 30, the economy grew by 5.5 per cent.

The Reserve Bank of India (RBI) left the short-term lending (repo) rate and the cash reserve ratio -- the amount of deposits banks have to park with RBI-- unchanged at 8 per cent and 4.25 per cent, respectively.

Retail inflation, based on consumer price index (CPI), remained close to double digits at 9.90 per cent in November, while, the WPI inflation in November stood at 7.24 per cent.

Though these levels are much above the Reserve Bank's comfort zone of 5-5.5 per cent, inflation is showing some signs of easing in recent months.

According to the report, inflation is likely to cross 7.5 per cent in the second half of FY13 again on oil price and power tariff hikes in the window between the March and November state polls and this will likely halt RBI easing.